US should be very worried about unintended consequences of its tariff actions: Uday Kotak

How does the global scenario look considering the events of the past 90 days or so?

We have seen the change happen in the US. We have seen it play out for the last two months and we will see some announcements on 2 April. First of all, India seems to be able to navigate the change and I hope reasonably. We have a trade surplus of $46 billion with the US. We should be able to navigate it, and even if we lose some of it, we will substitute it with some other country. There may be some net trade loss in this trade war.

Second is on investment flows. The US should be very worried about the unintended consequences of its actions if you take an aggressive position with the rest of the world, which the US has. The US is the most trusted for savings across the world. Every sovereign nation in the world puts their surplus significantly in US treasuries. What happens if there is a little wrinkle in that confidence, what happens if some of the monies of the sovereigns move away from the US to a Eurozone or gold or something else? What is the implication for the US, including the funding of its treasury? That is one thing I would certainly watch closely.

The other thing which is coming out very strongly is: each country to itself. Europe is realising it, that they have to spend a lot of more money on defence, and India has to recognise it. On defence, there are two issues. One is, of course, you have to increase the spend as a percentage of GDP. The second is, if you're buying from a third country rather than making it yourself, that third country may be an ally today but not tomorrow and may switch sides. How are you safe on your defence in an electronic digital world with a third country where the relationship is becoming a lot more transactional. Therefore, aatmanirbharata for India has to be through spending more on defence and building it in India.

Are there opportunities for India in such a world?

The biggest opportunities and risks are at turning points in history, and we're getting to one such turning point. It's both ways. Many businesses which don't exist may become huge, and many stable businesses may get shaken as well. We are all seeing the discontinuity of AI (artificial intelligence), and that is going to play out over the next 3-5 years pretty dramatically. People who can be a good judge of what things may or may not change, can really flourish in the future.

Another thing which is a very big risk is, we’re moving to a world where ‘universal basic income’ is a very strong possibility. Every citizen will expect a minimum right to live, and the State will have to ensure that at some point of time and we’re seeing that today. I think it will become a part of the fiscal but if it does, how do you finance it? How do you ensure your priorities, tax and collect revenue, at a time when you're also going to need to spend a lot more on defence? The whole game is changing, and I think we are at a turning point of history. India can't afford universal basic income today fiscally, but you will find no choice. Economists complain that too many dole-outs are being given or you’re becoming populist. But a politician has to win elections. If we want a democracy to sustain, directly or indirectly this will happen.

You had earlier said that there is a lack of global Indian brands. What is holding them back?

I think we were a very protected country and people are very comfortable with our 1.4 billion people. The protection of the home market is always there, so why should I really try to become a global brand if I’m making enough money? But for a firm to be truly world class, you have to get there. The global consumer is your test of quality and excellence. It's not about the price; if you have a strong brand, you can command a much higher price because it means intense competitive ability.

What are your thoughts on the current state of the banking sector, and how do you see it evolving?

What I'm beginning to find in the banking sector, in general, is much more short-termism. What the sector truly requires is a mindset of continuity and perpetuity. And here I think the challenge also is that the leadership must have a sense of long-termism. In many institutions, that is beginning to become a challenge. There is an excessive focus on, for example in banks, how will my balance sheet look on 31 March? How much lipstick should be there on that? That is the mindset, which is excessively short, partly driven by the marketplace as well.

In the case of banking, it's even more complicated. Whole-time directors (WTDs) have tenures of three years, which need to be renewed and approved by the board and the regulators. So, there is always a concern in the mind of the leadership. Am I going to get a next term or a full next term? And rightly so, the regulator also has that point of view because it's a highly leveraged industry. But it does bring in a mindset which is more short term.

Does the financial services sector have excessive regulation?

It requires more regulation because we've had bad actors and continue to have bad actors. We had a series of challenges between 2011 and 2020, but as we speak today, in the last three months we’ve had three incidents—one with a housing finance company, one with a co-operative bank, and one with a private bank. So, the nature of the industry is also very susceptible. It is other people's money, not your own money, which is an enormous amount of responsibility. If you build trust and ethicality and values, it actually pays you.

From a banking industry point of view, what are your thoughts on de-regulation?

The banking industry needs a mix of entrepreneurship and regulation, and entrepreneurship does not mean giving away professionalism. We can do with some de-regulation, with checks and balances and guardrails, and the way we probably need to do it is: how do we encourage innovation? One of the challenges is that if you look at the financial service landscape, it is banking, capital markets, insurance, NBFCs and asset management—a whole range of financial intermediation processes. You have the borrower and the saver, and then you also have the investor and the issuer. The way we are regulated today, we are compartmentalised. But the saver looks at it horizontally because they may be putting money in deposits, investing in mutual funds or buying insurance. But the regulator is looking at his or her respective vertical, so how do we get a holistic view of financial intermediation from the lens of a customer?

Do you think there is a need for a super regulator?

We already have a mechanism that can be made better, which is the Financial Sector Development Council (FSDC). That should be made more cohesive, powerful and focused on how we look at the financial sector across the curve. We already have a mechanism of FSDC, how do you give teeth to it?

As a major stakeholder of a bank, what keeps you up at night, and how do you see your role as a non-executive director at Kotak evolving?

What keeps me awake at night is how to ensure the trust of people—investors, customers, stakeholders; and how the firm continues to govern itself well by following what is right for all stakeholders. How is it that shark practices do not evolve in any institution? How do we keep finding new ways of growth? Because I don't think growth is a given, financial services is a challenging industry.

As a board member, my focus is much more on strategy and governance. I'm very focused on governance and strategy, and ensuring that at every stage, the bank and the financial institution continues to build the trust of investors, savers, stakeholders. The fact of the matter is, one, I'm on the board. Second, we continue to be 26% shareholders, and third, is we see our name on the board and that matters the most to us.

How can we fix the issue of huge commissions in the insurance sector?

The key issue is that there is a very strange behaviour in India, I don't know whether it's customer or insurance-oriented. Historically, 30% of the insurance business happens in March, partly possibly because of the tax benefits. This puts huge pressure on the entire system to achieve their targets in March. So, how do you change the seasonality of insurance so that it becomes a more mature, round-the-year business? If you look at sales for most insurance companies, it's 10: 20: 25: 45 for each quarter. I would strongly advocate to the Life Insurance Council to think about how you get this seasonality away, especially now that the tax benefits have gone away and we move to the new tax regime.

However, the fact of the matter is also that insurance is a 15-year product, so there's an element of front-ending for the 15-year period. And what I understand from the industry is that insurance is a much more ‘push product’ than others, so you have to find an appropriate equilibrium. Therefore, there is a case for looking at whether commissions can be amortised over the duration of a product, and I think the insurance industry is doing something on that.

Your view on Gift City and its impact on the financial industry and banking in particular?

India needs a strong offshore financial centre, but we have to be clear about its purpose. What are you trying to do? The best example by far is Hong Kong. One of the smartest things the Chinese did was to give Hong Kong to the British for 100 years and ran it like an independent country. When they took it back, Hong Kong became a huge adjunct for China. So, do we want to build a Hong Kong-like offshore centre, with its own jurisdiction, laws, regulation and taxation, like a foreign country within the country? To what extent is our democracy ready for something like that, or are we always going to have a situation where we can't make it so independent?

It's a fundamental issue about the structure of a country, and not about political independence because China has controlled Hong Kong since they took control back from the British in 1997. 'One country, two systems', that is the statement that China had then made.